as our speakers present their initial comments, we ask them to consider three questions with one, what are the principal reasons for the trade deficit, overall bilaterally? second, how worried should we be about the continuing merchandise trade deficit or its current size? third, what, if anything, should the us do about the trade deficit? i have asked caroline freund to go first. the mic is yours. >> thank you, and it is a pleasure to be here. i was planning to walk through

the peterson institute and pick up a copy at starbucks today but instead i had coffee here. bilateral deficit has improved a little bit. and instead we had one. i had bilateral deficit with huber that expanded. not really worried about either of these because i have a surplus with my employer. they kept paying me for my services and at this point i am saving so i am not worried about these, this relates to the points i will make today. i will focus on two things. what is the aggregate trade balance we should be worrying about, but unlike the fiscal balance which is all about fiscal policy, the trade balance

has almost nothing to do with trade policy. the trade balance has more to do with fiscal policy then trade policy. trade balance is not about trade policy. this has me really concerned when i got to points on the list they are looking into for what we should be doing about the trade deficit, product byproduct, country by country, this is the wrong approach, that is not really a good way to go about looking at it. the other point is bilateral trade deficits don't matter so this is like my deficit with starbucks which i am not particularly worried about. the bilateral deficits don't matter. let's think about what these aggregate trade balance is. the import more than we export.

how can we buy more from the rest of the world then we sell to the rest of the world? only one reason, we are borrowing. this is why i am saying it has more to do with borrowing, lending, saving and investment, then it has to do -- by definition we should be spending more than we are producing if we are running trade deficits. the trade deficit is currently $500 billion or 3% gdp. what are the causes of this? one of the causes is fiscal policy, we are running a fiscal deficit so this is why i am saying really concerned about the trade balance, important not to expand the fiscal deficit because the government will be

absorbing more, it has to come from somewhere. some will come from a broad trade deficit and this fiscal policy is super important to the trade balance. what happened over time that caused the trade deficit to rise? some people blame china but the other side of it if you look at consumption since the 1980s, consumption to gdp has increased dramatically, 62% to 68%. people are simply consuming more. a good thing we are having a consumption who, savings have gone down, consumption has gone up, we are absorbing more than we are producing. that is the reason we are running a trade deficit with the

rest of the world. it has to do with the exchange rate as well because the exchange rate, the real exchange rate is the price of goods and our goods and the dollar is the world's currency, there have been periods the dollar has been overvalued and in the past there may have been currency manipulation by china though that is no longer a problem and that means our exports are more expensive, and imports are cheaper and that can contribute as well. what is really missing from this list is trade policies. increasing a tariff isn't going to affect the trade balance unless it somehow affect saving or investment. unless it is a really high tariff of all partners it is not

going to affect savings and investment and even if it did, we don't know the direction it would take because it would reduce or increase, very different effects. we don't know what happens to the trade balance, the right tool isn't about trade policy but saving or investing. and it is a drag on growth when we are growing slowly, the rest of the world is growing slowly. and trade is heavy in manufacturing, and manufacturing jobs, lost manufacturing jobs are technology and animation and

manufacturing as share in constant decline since the 1960s, there is no sudden change, and there is some benefit, and the deficit, we have a lot of foreign investment and it is good for the us. and research and development with the us firm and higher wages, that foreign investment is good for us growth and jobs. the aggregate trade balance, and sustainability over time.

we are borrowing from abroad and that is adding up, with an we are earning. at some point know what is going to want to lend to me. and the external investment position, gdp in the us, and $8 trillion in the external debt come of the highest of any country in the world ever, a big number but as a ratio, 45% of gdp is not so bad. my colleagues have a book coming up in the next month on currency conquest and they note it is 60% gdp where country start having problems, countries like greece, portugal and spain passed the limit when they ran into

problems. we have some time before we get there and the real concern is sustainability. and it is not about trade per se. >> some countries have stuff we need in life, and saudi arabia has oil, a trade deficit with saudi arabia. supply chains are another reason we have deficits, we have great supply chain with mexico where they produce parts of components of things we need or assemble products from high skilled parts and components and that makes our companies, in these supply chains.

germany has a huge trade surplus, the low-cost suppliers like the czech republic and hungary and so forth and really big ones that car companies benefit from cheap imports just as we benefit from cheap parts. and if we are really worried about accumulating debt over time we need to rein that in or limit it and save more, there are things we can do to save more. oddly, brady ryan tax plan is not the border adjustment tax that can help us rein in the trade deficit and that has lots of problems, switching to a consumption tax might help

because that encourages switching from debt-financed to equity so there are features of that plan that might rain in the trade deficit, doesn't come from anything like border adjustment. there are things we can do, john williamson, and joe gagnon and others i mentioned before. like china is doing now, they are supporting their currency running a trade surplus. what we don't want to see countries doing his intervening to weaken their currency and running a surplus, that is not okay. that is another kind of agreement you can imagine and

with the bilateral deficits they are mostly political. we talked to countries 1-on-1, we talk about us/china relations but we should think about deficits that way, it is the wrong approach, just some countries have things we need, we should be focused on the aggregate trade deficit, if we are worried but trade policy is not the answer. >> thank you, peter, will you pick it up? >> this may be the only time any of you get to see me on the left. did you plan this? >> i thought you would enjoy being there for a change. >> i had dinner at the afl-cio. at any case, my are very different than the previous

speaker. it is an accounting identity that the trade deficit equals savings and we have a trade deficit because we have a savings deficit and causality from trade deficit, if i wanted to debunk the trump administration that is what i would do. i was an economist as many economists do, how is it trump happens, i never endorsed donald trump, i want to be clear and i don't want to defend his policies. i could structure an argument and you just heard it, if i was worried about the economics profession being debunked before the depression i would make that argument. to focus on my argument, and the current account deficit, i could

say because we have a current deficit we have capital inflows, build an argument in either direction, to accomplish that. in my mind, the trade deficit is the result of a combination of the technological forces driving globalization on the one hand and mercantilism and nationalism on the other. we have a rules-based trading system which i much admire and seems sorely threatened. international trade law, i have written about this. i read about those published at my university. it is remarkable in that it is the most economically informed aspect of law along with antitrust.

as long as economists sitting at the feet of the gods, lawyers that write these documents, it is conceived from the notion that it brings together groups of market economies for the purposes of trading on the basis of comparative advantage and things like exchange rates will adjust to inshore that the outcomes we teach on blackboard that universities when we teach comparative advantage will happen. employment will be fool, most importantly, adjustment takes place, trade barriers effectively move from one employment to another maybe with some disruption requiring some assistance they are not displaced from the labor force.

we have to recognize a couple things, most of the trade deficit was from china, 60%, it has been important and continues to be but if you saw the trade deficit you solved the problem. if you have a system based on the notion that markets prevail trade will balance out and you have three of the four largest economies which constitute half a trade, and a matter of public policy that we should run a trade surplus, exchange rates should be manipulated to that affect and a variety of ways the currency market intervention to cause by virtue of public

policy, to cause and exchange rate to be overvalued the system can't work. we have to look at trade policy among other things to determine why we have a trade deficit, it requires fundamentally an open mind about these issues because it causes us to think in ways that are contrary to what we put on blackboard's, and pure competition where children learn about markets. it is a beginning but not a end. the story is not the assumptions we make about free trade but their violation and whether they have consequences. and violations have consequences. we have people who have left the labor force for no apparent

reason other than they feel discouraged, 7 million men between the ages of 25, and 55, unemployed and not looking for work. alongside that, part of our fiscal deficit finance is a support program which can impose marginal tax rates of 50% to 70%, with obamacare in place, the food stamp program, modified as it has been, a healthy male 25 years of age sitting at home watching espn in 31 states is eligible for free healthcare and food stamps and can therefore sponged off his girlfriend and never have to look for work. mindful of the northern european countries permitting kids to go to school forever and getting a stipend to do it.

that is not now. we need to talk about aggregate, specific policy that has effect on behavior. i am saying the trade policies of principle trading partners have something to do with this deficit and the way we spend our money, not just how much the government spends has something to do with it too. the paths consequences are profound. the amount of debt we are amassing is great and looking at a number like 60% is silly because we have the ability to print the world's money. we will pierce through 60% but a meltdown on the basis of the us debt will not happen the way it did in greece because greece can't print money. greece needs euros to pay it that. our debt is denominated in dollars. our meltdown will come today but private actors don't want to hold the debt but central banks don't want to hold it.

and the american public doesn't want to hold it. we can always print it. when do people demand such high interest rates, that makes our federal budget unsustainable. if it is some kind of blackhole of the kind we have never seen, we have never seen principle reserve go bust. and any financial crisis we have a long period of adjustment. when did we let's have a financial crisis in 2008. and we have no counterintuitive, we have no other examples to

draw attention, we don't know what it is going to look like. it will not be nice, it would be protected and take a long time to recover. and and technology displaced workers and manufacturing. and manufacturing jobs. we know that manufacturing and import industries as well as export industries, workers are more productive than they are in domestic pursuits, we do not compete in trade. this bears out in other economies. we have more aggregate demands, to go to work, how we dealt with

the social programs. it is a powerful incentive to get over the couch if those were removed, they might get off the couch, but shifting employment to raise gdp, would raise r&d because most manufacturing, a good deal of r&d is done by manufacturing type activities. i would point out that a lot of r&d has followed american manufacturing in response to trade barriers, consider the situation in china where a good way to get intellectual property protection is to promise to move more r&d activity. to not enforce the foreign corrupt promises act, i don't know if something happened there but i would be eager to actually

get the justice department to do what i wanted to be investigating emails on that. people have become very good at avoiding prosecution, if they know they have to avoid prosecution. and how do we get out of this mess? the gdp, we have been growing at 2% a year. why has productivity growth gotten smaller, i find it ridiculous when i hear arguments from northwest that say all the

good stuff has been invented. he hasn't been reading about robotics. would you rather have this or a flushed toilet? i'm old enough to have used an outhouse. i can use an outhouse to keep this. this keeps me more productive and provides more freedom of movement during the day. i don't have to be near a telephone all the time and so on and so forth. remember that woody allen movie where he paid a character who called his office and told him where he is going to be and what number he is going to be at and diane keep said you forgot to tell him about the payphone we will be passing. that is what my life was like before this because i don't work at a large institution, i work alone, i was always telling people where they could find me.

in terms of the solution, we need a grand bargain on exchange rates. we had one before. the plan is a report but the grand bargain on exchange rates would have to include china and china is not going to play by the rules on this sort of thing so i don't think the grand bargain is possible. that would help us get out of this mess. it does come back to what trump talked about during the campaign but i would point out romney talked about the same things when he was campaigning but didn't attract the same ridicule because let's face it, donald is a hard guy to like. he is not very politically correct. there is something else going on. we are at a moment in time, people say universities have become closed spaces with closed minds. that is indeed happening but the economic profession is not even

willing to cast doubt on what they have been prescribing for the last 50 years because of events like trump they don't want to open their minds but to me that is the greatest barrier to finding a solution because we have to deal with china in very different ways than say please sign this agreement and comply by these rules. that simply won't happen. >> i never talk about outhouses and productivity -- the trade deficit, sure we will get to that later? >> thank you to wita, ken levinson, to trade deficits matter? an easy question for any

economist, the answer is yes. what is harder is precise ways to extend, conditions, trade deficits do or do not matter. trade deficit is not about poor people and whether we provide health care. we have 20 financial crises in 1975, we have a rich data set to understand how advanced economies respond to financial crisis, and old classmate of mine. and focus on the underlying causes. and positive developments,

accelerating growth drives consumers for more important trade deficit allows us to consume more than we produce including more investment goods and what happens with strong productivity and good investment, rising trade imbalance. what we use to announce the monthly trade figures, the monthly trade deficit figures in the 1990s in the midst of the longest boom in american history under secretary of commerce. under other conditions, rising trade deficit signal negative developments. in particular areas, they are falling behind. more commonly the negative events of trade deficit arrives

from financing by international capital flows. we have to pay the net difference by selling dollars to purchase the currency they want to receive payment in. for an companies with dollars that they can only spend here so they use them to buy us stock companies and financial assets. the negative here is foreign investors take home dividend interest in capital gains. those foreign purchases of american assets increased supply of capital which can kill our interest rates. as an accounting matter the trading deficit is negative for growth. that is an economic matter.

it stimulates demand and jobs especially when our saving rate is low. it would be better if us savings finance additional investments but we would be worse off if those investments did not happen at all because of an untutored president slapped tariffs on goods from places that run trade surpluses with us. public discussion of the trade deficit focuses on jobs, not growth and investments. trade costs and jobs especially jobs between economically disparate countries, that is trade deficits between advanced economies like ours and developing economies like china's as opposed to trade deficits, united states and other advanced countries. jobs are lost, companies that are at least competitive with foreign producers, usually

industries that can operate in other countries at significantly less cost than companies from that industry, that is why it happens in trade between disparate types of economies. that is what off shoring is all about age trump and his allies announce trade deficits, we should remember more than half of us imports are what are called united party imports, that is when a company here imports parts or goods from its own foreign subsidiary to transfer within the company. that is half of our imports. it is 30% of our exports evolving transfers in the other direction between us and foreign parent companies, overseas facilities. trade also creates jobs in us industries that operate here at less cost, or higher-quality than elsewhere. trade moves jobs here as well as

investment, from industries that are not cost competitive such as manufacturer of basic commodities to those we are talking competitive like advanced manufacturing and many services. inevitably these developments cost some americans their jobs and we should help them which much greater access for the means to retrain and if necessary relocate. we can do that without undermining our strength as the world's most open economy. it is -- let's consider how many manufacturing jobs were lost the scale of manufacturing jobs lost to global trade. one famous study found trade imbalance with china from 1991 to 2011 cost 2 million jobs including 1 million in manufacturing. today, 12.4 million americans

are employed in manufacturing, that is 10% of all private employees. add another million and the percentage arises to 10.8%, from 10% to 10.8. compare that to the 1960s, when 25% of employees worked in manufacturing or the 70s, when they made up 20% of workers, this signals trade deficits have had very little to do with decline in us manufacturing jobs, since manufacturing's large decline and share of employment in the 1960s in 70s happened when we were running trade surpluses, not trade deficits. similarly there is no direct relationship between trade deficits and people's incomes or living standards. from 1965 to 2000, manufacturing shared gdp fell from 25% to 15%. real per capita income doubled

from 22,800 to 43,900. rising living standards depend on rising productivity which in turn depends on innovation, worker skills and capital investment. trade deficits had no adverse affect on these dynamics, trade promotes higher productivity and living standards in three ways, shift capital and jobs for less productive to more productive uses, provides access to the best ideas developed a broad which we can use and improve on. the iphone peter held up is an example of an industry where the us is a world leader, we developed, we didn't invent the cell phone, the commercial cell phone. the things did. we took their ideas and improved them. that is because we have an open global economy. lastly, trade puts competitive pressures on us companies to

innovate. i want to close by inking about trade deficits in a general way and this is what carolyn said. and the trade deficit is determined by how much you consume versus how much we produce, how much we save. country's trade deficit arises that country's own saving investment and consumption behavior and not the subsidy policies or currency policies of other countries. those policies are how they are distributed. policies that involve currencies and exchange rates.

with everybody else currencies, and that is the exchange rates matter. it is sometimes that our trade deficit reflect in large part china's program to keep its currency undervalued relative to development. it may affect the bilateral trade deficit, little if any impact, a consumption behavior of the trade deficit. in any case we saw two decades of currency manipulation by china had marginal effect on share of manufacturing jobs in the economy blues my best counsel is to remember one thing, trade is not an adversarial phenomenon. it involves voluntary exchanges.

people trade, it only occurs when both sides benefit. >> thank you very much. with discussions around the panelists, most people, getting lost in details of the balance of the statement isn't what's they are worried about. do trade deficits go with less employment and less economic growth in the united states. the trade deficit figures in the midst of an economic boom, what does history tell us about relationship between trade deficits in economic growth, trade deficits and overall

employment? >> i tweeted a picture of us growth, and the correlation is close to 0 and not significant and exactly for the reasons stated, in really good times, high high demand and import a lot, might be importing intermediates going to the production, and trade deficits, don't overheat and during bad times when you are running a trade deficits there may be some cost to recognize, it is a drag on growth but for the long history, there is no correlation between growth and the trade deficit.

>> let's think about our own lifetimes. we had the lowest unemployment and strongest growth, the last 1960s, in the 1990s running trade deficits which is an illustration of carolyn's point. it is not to say there aren't elements underlying trade deficits or trade surpluses that affect the growth, of course there are but they work in both directions, as i pointed the outcome of the trade deficit increases the supply of capital in the united states which lowers interest rate which in turn tends to increase growth,

and negative affect on growth and positive, economics almost all phenomena work in both directions. >> the notion we had a lot of growth with trade deficits and for growth with trade deficits and so on and so forth, only illustrates my original argument that a lot of identities, easy to grab an identity and draw an arrow in one direction or another. with regard to the most recent trade deficit, we have to look at how markets function and political in these responded to those markets. in recent years china's entry into the wto and increased imports from china, people have been displaced. people have lost jobs because of increased imports. the question is what happens to

them? many have dropped out of the labor force and successors, children have taken those jobs have not participated in the labor force to the same degree. that is a labor market adjustments problem. we have to consider how government entities have responded. and hasn't been very suspect successful. people lose their jobs, they don't adjust, and you're going to reduce growth. i didn't shake my head when you were speaking, i was kind enough not to do that, thank you. it is hard to have an open mind about this.

it is difficult for me when you realize i wrote a book called making free trade work and that is how i became a full professor. i have to recognize some of these things haven't worked out as they should and if i was sitting on a panel with trumpeters i would be taking a different approach. for example it doesn't warm the cockles of my heart that they are taking aim at mexico. in my view the trade deficit with mexico has a lot to do with mexicans doing smart things. for example they developed a network of trade agreements with other major trading partners such as the europeans which permit them to be a very effective hub for manufacturing automobiles to be exported to all parts of the world. our problem with mexico has been they have been smarter than us

about exploiting free trade in a way textbooks say they should. problems with china are the reverse. it is very easy to say in a world where you work on a blackboard and countries with certain factors and no one is very large, no one can influence prices by themselves, or industrial policies don't matter and to say this will raise incomes. there's a reason elections have been coming out the way they have and it is not just trump's non-plurality victory. democrats have won less than 20 governor seats. something is going on out there. the policy of the last two administrations has been to not do much about chinese mercantilism but to provide

social programs to compensate these people and that has not proven enough. my friends on wall street who run this administration and will decide what our trade policy will be, i doubt they ever spent an afternoon dining outdoors the way they made in manhattan is my son does in reading, pennsylvania, looking at prostitution, boarded up windows and opioid but that is a real part of america we don't see here. and labor market adjustments haven't worked in those places and have to ask why, it is amount distributed outcome that

is occurring. and that would not be a good thing either but in order to discuss this you can't constantly back down to identities and not really address what it is china does for particular markets in this country, failure to do so is problematic. >> i'm struck by how little faulty trade policies on the part of the united states have been identified as the problem. with the exception of the things about china and yet the debate -- what i am saying is the trump dialogue is allowing faulty trade policies on the part of the united states and by that, tariff liberalization, you are

on the opposite side saying smart countries do more trade agreements and no one here at the talking about china. and what are you responding to? >> i'm really concerned about blaming trade for the labor adjustment problems in the united states so it is true trade played a small part so even if you take the study that doesn't look at it as general equilibrium it only looks at the effect of china directly on manufacturing. they find it is 70% of the lost jobs so more than 80% of the manufacturing jobs lost for other reasons and the reason i am concerned is it is so easy to blame the foreigner and not take

any blame on ourselves. the future of work is different. we have developed machines that do things differently. there are not jobs for high school dropouts or high school educated who want to go directly to a factory and his unskilled. look at the factories, they are people wearing protective suits because everything has to be done in a clean environment and have to have some education to run the new machines. it is a different environment and we have to recognize this. what i'm really concerned about is seen a phobic trade. it is easy to blame foreigners and it is not our own fault and saying that adjustment the us has done so much adjustment and that is why people aren't in the labor force is absolutely insane. europe does way more than what

we do. that is why people don't object to trade the way they do here but we need to do adjustments for everything because otherwise trade and outsourcing take the brunt of the blame when it is just the future of work is changing as we have to address people are sitting on their couches and taking drugs but they are taking drugs because they did backbreaking work for many years. we got rid of those jobs. that is a good thing. >> i would like to go to the audience. >> what i was going to say carolyn has said but i want to make another point. when peter says if you have a phenomenon, bilateral trade deficit the cost someone their

job, should you do something about that? of course you should, with labor policies but that fundamentally ignores the other side of it which is to say that trade deficit represents the ability for american businesses and individuals to consume those goods at less cost than if they are manufactured here. that allows them to buy more things, made by americans or made by foreigners which drives growth. to ignore all of the benefits of comparative advantage driven trade provides i think a very partial and distorted picture. >> i want to go to questions and

answers, we have mike roaming around, if you ask a question please identify yourself and your affiliation and ask a question. >> of folks could not speechy and ask the question of the panel we would appreciate it. >> i can't deliver what copy machine i'm supposed to associate with peter morici. we love watching you and thought you were the most successful trade person on television saying something people listen to so good seeing you again. my question is over my head, the question is i always thought the reason we were able to run trade deficits was we printed money and the chinese have now gotten wind of this, they keep talking

about displacing the dollar and using the dollar. explain the relationship between our ability to print the money and the discussion of the causes of the trade deficit? >> let's keep the answers short. >> central bank the don't have reserve currency don't back up their money with gold anymore but by holding us currency and us bonds but with international financial dealings bonds are as

good as dollars, we provide the liquidity behind growing money supplies that grow with economies around the world. someone like venezuela -- not a good example the way life is in venezuela but they mexico will hold dollars to back it up. there is some relationship there. does that answer your question? the economist most correct when they most understood. >> steve tells us how he could print money. >> let me say one thing that may clarify in part, the reason it works is the united states remains the largest and most productive economy in the world and consequently produces the

highest returns of any advanced economy and consequently, there's conference you can invest in and get a sound return in the united states. >> a number of hand up, please. >> mine is pretty quick. between 2 extremes on trade, one is nafta in the 18 countries with free-trade agreements. you put all the numbers together, and trade surplus with added services but all in all, half of exports, 400 million in these countries. that is by any measure a good

return. it is in the news next week. and if there is a trade war, the first casualties from the us perspective. and as we prepare for next week. >> and at any airport, you are rising into. there is trade within the

country much easier. and someone who gets out of high school and we train them in a way that there's a job waiting for them. the investment in those categories, what we are missing and what china and other countries around the world are doing. >> the educator here, i took my last class in march. i am at the tender age of 68. i lived here, and give a speech

someplace. and one of the basic statistics is this is going to cause the kind of labor adjustment prospero talks about. and a big boot on the behind and parents screaming at schools to do better. high school education in new york state today and even when i was a boy is not like i school education my father got. we really needed this. the reality is we send more than half our children to college now and colleges are not doing their jobs. one study shows something like 40% of graduate can't do critical thinking. a lot of the college graduates

working at starbucks are operating at their full skill level. they look good, they smile, they sound educated, how educated they really are i don't really know. starting to doubt it. they certainly aren't prepared to live in a world where, hold your breath, if you live 20 more years, i hope to be 88 someday, the dentist filling your cavity may well be a robot. that is really possible. in that environment the kinds of work that is going to be available and the countries that are successful, going to be very high skilled in the countries that are going to be successful have a population of working age people between 25 to 70 who can run those robots as opposed to serve coffee and i don't know that we are doing what we need to do to be a really successful society. i don't know that we are going to be the most productive economy when we meet again in 20 years. the chinese may very well be

because they understand something we lost sight of. there is no substitute for being competitive as an individual, as a company and as a country and thinking of the solutions to problems, 60% of your budget on social welfare programs to ameliorate the effects of being displaced and to go around the country and say we have a jobs problem which is no fault of your own and the government is going to solve it in the real problem is maldistribution of income and things of this nature is a terrible mistake. >> my dentist is kind of a robot. i hope he is not here. questions real quick? >> center for business policy. you all agree trade deficits are not a key matter. what does the administration hope to gain by making, as we learned yesterday through the letter to the hill, the draft,

the focus is going to be on the trade deficit, goods deficit with mexico, that is the first item of approach, the most important item. what do they hope to gain? >> headlines, a political advantage. it is to today's discussion, and this is a piece of political

capital. it allows the administration to talk about something other than whministration to talk about right now. >> thanks very much for your comments. everyone is in violent agreement that a good trade policy has to also be partnered with a robust economic agenda. part of the services industry, the data on services, not as good as it should be, but we know the us runs a surplus in services around the world. a lot of country say we have a deficit in services, what should i do about it? there is a little bit of a demonstration effect that i think is lost on the trade deficit debate. i am wondering if the speakers

might comment on that. i don't know the companies can do more than they are doing as we are in redefining the workforce, pretty outspoken on training and all those things but it also needs a good trade policy because we are all around the world. >> that is a great question in my comments and i left out by mistake services are an area where the us has a trade surplus, an area where we are extremely competitive, like manufacturers where traded goods have higher productivity and pay higher wages and all that and services are the same, they are even better than the trade to the manufacturer, companies like microsoft etc.. ..

but this is precisely why we need trade agreement, is when it countries to open their service sectors to the extraordinarily competitive u.s. services. that was where the bake is gained some tpp would've come from the transpacific partnership is services. i think it's understudied because the data isn't as good, and actually we don't even know how much data is crossing how much is valued at because so many services are free. even when you buy manufactures now a lot of which are buying services because there's this dataflow and maintenance and things like that, contracts that come with it.

so services is an incredibly important part, and these jobs are just as important, if not more, for the future of this country than manufacturing jobs. >> just to follow up quickly on what caroline just said. the way in which trade statistics are conducted, if an automobile comes in from germany, the entire value of the automobile is counted as a manufactured goods. what the world bank, not the world bank, the wto and the oecd, i think the world bank has done some come is they look a trait and broken it by value added. as caroline was saying an automobile or airplane to comes and has lot of services embedded in it, engineering or accounting services or computer-related services, whatever. the wto and the oecd did this multicountry cost economies study and they said if you look to the value added of trade whereas currently the way it's done through customs, said that

about 23, 24% of world trade was services. when you do the value added approach it turns out that something like 48% of world trade our services. are there other questions though? some way in the back and then in the middle here. >> doug palmer with political. i came in a little it's i he talked about this new executive order that trump is signing today where he is basically going to direct ustr and the commerce department to examine all the significant bilateral trade deficits to determine what their causes are. then i guess that's going to provide him the ammunition that he needs to go after these bilateral trade deficits using whatever trade remedy tools are at his disposal. i just wonder could you comment generally on that idea?

do you think that that's an effective approach to trade policy by trying to examine the root causes of the bilateral trade deficits with all these countries? and then just more generally, what do you think are the odds that the trump administration is going to have a significant, make a significant impact on the overall trade deficit? >> i don't think that economics provides you -- would you like to -- >> to go ahead. >> economics alone provides an edganswer to this at all. worst of all, i've only read the "wall street journal" account of it. i haven't seen the draft but as i read the count it said that they would study our trade agreements and, to the extent that they'v they been adequately enforced, then the particular trade barriers of individual countries. that sounds to be an awful lot like the annual report of the use trade representatives office.

and peter doesn't have much staff. they have him over in the eisenhower building and understand it the right outer space they are moving him to pueblo colorado. [laughing] which reflects why this is happening. not to be cute but there is a tug-of-war in this administration between the national economic council on the one hand, and ross and others on the other as to which which could trigger this sounds like booting it a bit. that's what i think is going on is that there booting the issue. whether they'll have an impact comes down to really discussions with china. mr. trump doesn't seem to quite understand that you can't come to town and make everybody your enemy, you know, belittle rand paul and expecting to help you on healthcare and then jump on the conservatives ended output for you and then expect them to help you with taxes. the same goes to dealing with foreign governments. who hasn't he insulted?

but the one place where he can have an effect is where you have, that's true, but that's coming. they are making it increasingly hard he's even said to be nice with them. the only place he really can have an impact is in some kind of bilateral or he has a lot of leverage and that would either be with mexico or with china. with mexico i don't think that's going to happen because the structure, the automobile supply chain. it's that simple. with china that may will be the same as well. but my feeling is only way he's going to have an impact is in a bilateral discussion, because as a political on the other side to avoid big trouble and the whole thing blows up, and that could be the chinese. bubut i don't see them changing the whole world on the basis of being angry with the whole world. it's kind of like me try to take on the whole economics profession. it doesn't work very well but i don'but idon't have to be presif the united states and get

results. >> okay, rob? >> peter is exactly right about one thing, about one thing, and that is ustr does this every year. and not only that come every administration when it comes in does it again. and sometimes you find, you find examples which u.s. negotiators can take to other countries and receive a concession in some negotiation on the basis of particular behavior that's been uncovered. none of it is in effect on the trade deficit. again, they can affect the distribution of the trade deficit but not its size. the one thing we know about this particular administration is that if it gets its way, the u.s. trade deficit will rise sharply. the reason we know that is

because if it gets its way, your savings will fall substantially. because the u.s. budget deficit will rise substantially. >> did you want to say something? >> that was how i started my comments and that my laterals really don't matter and that right now the fiscal deficit is what we need to worry about for the trade deficit pics of the trade deficit isn't about trade policy. i want to say this again. it's much more about fiscal policy. or other policies to do with the savings and investment. i want to make one comment about china that we talk about this bilateral with china. but because of supply chains are trade with china isn't just china. its factory asia. some of the trade deficit with china is because just like with factory north america and europe as factory europe, they have factory asia. some parts and components go to china, assembled, come to us but because trade is measured in

gross, not in value added terms, we end up with a really big deficit with china. it's quite a bit more complicated than that. >> one of the things about your question, what struck me is the fact that at least the draft that has been circular of what's going to be studied on these trade deficits, it really missed a whole bunch of factors that were being discussed here. it was all about different aspects of trade policy, and some of these broader issues which have a bigger impact wasn't even in the list of things to look at. one question i have is, is this going to be a real from the bottom up look at trade deficits and understand them in the sense it was discussed here, or is it just kind of a hit list of favorite topics? >> other questions? one here, one there, one there. maybe what we will get this is maybe ask the questions and then we will have the panelists have

one last shot at them, okay? we will have three questions. one there, don phillips and i thought there was one over here someplace. right there, yes. >> barbara buie whitman. my doctoral dissertation was entitled the impact of u.s. fiscal policy on the composition of our exports and it was written 30 years ago. i've also stood up to our current president when he was a candidate and said to his face we do not have the worst trade negotiator in the world. and he looked startled and to the next person. but the most important point i've heard this morning is one i wish were better understood and that is that what is really changing is the whole nature of supply chains. if you build buildings or pipelines and you say all the components have to be american, that's an easy policy to articulate, whether it's a good one or not. but if we have changed the nature of where production is

and whether parts are made and how they are traveling around the world, how do you incorporate any understanding of that into any policy articulation so that the public begins to understand it? >> okay. >> don phillips. there is an argument that these big trade imbalances are driven by a number of key countries, namely china and germany. more or less structuring or reading their economies so that they restrain consumption, therefore, they have a big capital surplus that has to go anywhere and goes into the u.s. and that drives the big trade deficit. i wanted to give have any comments on it. >> and then this last question here.

>> thank you. i would like to come back to the example that peter evoked repeatedly about the 21 years old or 25 years old on his couch, protected by obamacare and having food stamps and watching espn. i mean, i have empathy for that guy, but i absolutely don't see trade policy is going to affect him. i can see lots of internal role, economic policy decisions by the u.s. government that could help him, but i don't see what trade policy has to do with that guy. >> okay, thank you. if we can quickly, each of you respond to any or all, whichever of those questions you would like to respond to. >> i'd like to start with the first because i completely agree.

i think supply chains and trade are so important, and we have seen that with the nafta debate, and companies come in and sing, wait wait wait. if we lose mexico we're just not going to be able to compete in the global economy. i think the way to explain it to the public are these pictures i've seen of products and little arrows showing for all the components are coming from. it's kind of like the picture you might see of the ivanka trump sure all of her jewelry and closer from and how much they cost, except this is a picture of an actual product showing all the parts and components we need to make the product. so you cut off the wiring harness in a car which comes pretty much exclusively from mexico. well, there's going to be $200 or whatever more your car is going to cost. we need all these parts and components. it's really the company to make these products need to come out

and develop pictures like that. >> okay. >> to respond to the second question, countries are free to organize themselves in ways that meet the goals that you want to achieve. and if a society decides that what they're going to have a less consumption and more export driven growth, through regulation, and the society accepts that, that's their right. i don't have any problem with it. we are defining a different kind of society can one with open markets and open economy. and driven by innovation instead.

that's what we are comfortable with. but finally, again, however china organize itself, or however before that korea organize itself, had a very highly organized strategy that was export driven, it really, china learned an enormous amount from korea, and korea's enormous success. however the organize themselves it will not affect our trade deficit. our overall trade deficit. we keep on saying this, but we keep on going past it. it may affect the distribution of it, but it doesn't affect the size. i'm perfectly satisfied with much more satisfied with

following the american model, and american values for how to organize the economy van to try to quote-unquote compete with china -- van. the country with per capita income barriers in order to change a figure in a bilateral trade deficit. >> let me add one thing to what robert said, which is that has been forgot in this whole discussion when we talk about china. china brought 500 million people out of poverty over the last 20 years to their policies, and that something really to be celebrated in the world. they were living under two dollars a day. that's not happening -- the case anymore. >> i would celebrate that if we hadn't driven millions of americans into poverty in reading pennsylvania the wait is right now. but regards to changing the

trade deficit would affect those workers that are not working, trade policy. okay. if we could maneuver trade policy in such a way to persuade the chinese to be less protectionist so with less of a bilateral trade deficit with china, we would have more people working. in turn that would reduce our fiscal deficit, not increase it. depending on how we get it. i want to be very clear about this. i'm not in favor shutting down trade with china become a favorite kind find a way to leverage them to be less protectionist. that could imply as selling to more stuff as well as us making more stuff here. but i would in turn put people to work. it would be fewer people on food stamps. it would be fewer people on medicaid. the last i did the math, that reduces our fiscal deficit, reduces our savings deficit. it doesn't increase it. so my feeling is that policies

in china affect our fiscal deficit just as they affect our trade deficit, and the reverse. i can run and deny their direction. and so that is how tables would affect that. one of the things that is going on throughout this discussion and certainly the administration has not helped itself either with its choice of people to do it speaking or with the rhetoric of the principal, is that the policy has been seen in a most draconian terms, they were going to shut down trade with china, a bottle of this huge tariff that would be permanent and it's really not going to be there for the purposes of getting a better deal. if we manage to get a better deal with a country that is so large and so significant in our deficit, we will have an effect on our finances here. it will reduce our savings deficit. i would suggest both economies longer-term will grow much more rapidly than they are right now. >> well, thank you rob, carolyn,

peter. very thoughtful discussion, i think the audience and wita for organizing this. >> thank you, peter. thank you everybody for your questions. next to the paper this is the kind of lively discussion we're hoping to have. very grateful to all of you. we will be addressing the issue of supply change in the future, the global economy through our next initiative and we hope you all come to that event, and watch while you're writing about and circulating on our website, america's trade policy.com. thanks again to the panel, and thanks to all of you. [applause] [inaudible conversations] >> saturday booktv is live from the 15th annual annapolis book festival in maryland.

>> watch the 15th annual and annapolis book festival live on saturday at 10 a.m. eastern on c-span2's booktv. >> u.s. ba